Why Microsoft Is Buying Skype for $8.5 Billion

Updated at 12 midnight. Microsoft has bought Skype for $8.5 billion, in an all-cash deal. The deal closed a few hours ago. is close to finalizing a deal to buy Skype for between $7 billion to $8 billion. The Wall Street Journal confirmed (s nws) the news after we had first reported it yesterday. The announcement is likely to come out later today or tomorrow morning, according to several reports. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates will host a press conference in a few hours.

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Skype has been up for sale for some time, thanks to some very antsy investors. My sources indicated both eBay (s ebay) and Silver Lake Partners have been getting nervous about the delayed initial public offering and have been pushing for a sale of Skype. Facebook and Google (s goog) were said to be earlier dance partners for Skype, and Microsoft (s msft) was a late entrant and is now close to walking away with the prize.

It won’t surprise me if Microsoft comes in for major heat on this decision to buy Skype — and the software company could always botch this purchase, as it often does when it buys a company. The Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

I also don’t believe Facebook and Google were serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In essence, I feel Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

Guess Who’s the Big Winner

The biggest winner of this deal could actually be Facebook. The Palo Alto, Calif.-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement, and you can expect it shortly.

Why Did Skype Want To Sell?

Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skype’s revenues had stalled.

The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise.

So Who Made What?

Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. So in the end, eBay did make money on the Skype deal.

The Skype Founders

Niklas Zennström and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion. Damn, these guys know how to double-dip!

Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion.

Andreessen Horowitz had three percent of the deal and made $205 million profit on their $50 million initial investment.

I like skype and have used it since I don’t know when. Most skype users are over in europe and beyond not in the usa. I am actually glad to see skype out from under the umbrella of ebay and paypal management. Hope to see that cotinue to go away because maybe just maybe you will be able to talk to someone on the damn phone about customer problems. I like the idea of skype moving on in the usa. I am very happy to see the future now

This is terrible news. I love Skype and use it a lot. With Microsoft as the owner I only expect quality and service to drop, and that Skype will be Windows only and refilling the SkypeOut can only be done from Internet Explorer. Bye bye to Linux, Android and Iphone support.

INteresting, Microsoft actaull has a good video and phone service in MS Communicator, but this is aimed at businesses, and is tied up with MS Comms Server. They finally had a Mac client out with Office for Mac, so both those platforms had working clients, only Linux, and iOS etc was left out in the cold, but no reason why clients couldnt be developed.
All they are getting with Skype is the peer to peer transmission method and all the IP that goes into it, but not much of it could be applied to office comms whih is actually fairly well sandards based, only the authentication scheme it used was proprietary. So unless they want to buy it to halt development of skype clients on other platforms, so MS can turn it into their own Facetime competitor?
BTW, I really want a Facetime cleint for Windows, and have it allowe over 3G from my phone, then it would be AWESOME! At the momement, Facetime is crippled by these artificial limits. It works fine of 3G here in NZ, as my iPad teathered through my phone works perfectly. Why can’t I just do it from my Phone, Apple?? I end up using Skype instead, because then My wife can use here Windows PC, and I don’t have to mess with teathering the Pad.

The biggest winners in this will be Ebay which gets an unexpected windfall and the original founders i.e. Janus Friis and Niklas Zennstrom. I mean seriously how can you sell the same company twice and make billions both times. Ebay screwed up the initial deal allowing the founders to have , as Om say, Double Dip

Dudes, it’s the Social Graph that these companies are fighting over… 100million+ active users, a network of friends and business relationships, many users who already did financial transactions with the service.

Add some more social network underpinnings, further push on mobile, use Skype credits for other payments, etc.

Google could deerly use this to reach their annual goals…

(sure, gMail/etc. has tons of users as well, and there is some implicit social graph in there as well. but it’s just implicit, users did not explicitly ‘invite’ and ‘accept’ each others as colleagues, which makes quite a difference. )

Maybe now they will bring back Skype for Windows Mobile 6(.5) users. Skype said they didn’t want to develop it further for the crappy Windows Mobile 6 platform, perhaps Microsoft now will change their minds… Truly hope so, so my Omnia i900 is still performant today, event without all the apps and other gadgets. Only thing missing is Skype.

Skype is brilliant for anyone who travels internationally and has a stable internet connection. As a paying customer of skype I really hope that microsoft don’t ruin this service like they do with so many other products. Keep it simple and efficient don’t try to mingle it with all their other bullsh*t software and I’ll be happy, I’m not a big fan of live and never will be.

I am also a paying customer but I have been looking for a replacement as the skype client is getting worse and worse. The one on the iPhone is terrible, as is the one on the Mac. I can’t imagine either getting better under MS.

So – this is the time, and the chance, for a serious Skype competitor to emerge. It can only be a matter of time. facebook could certainly do it, and they’d instantly have that massive user base to make it popular.

There seem to be lots of VOIP companies out there, lots of companies with the tech (Google included), but up to now nobody has actually come out and made an easy to use client that runs everywhere. Now’s the time, folks.

I was excited about FaceTime but honestly even though the iPhone 4 seems to be everywhere, the dual limitations of it only working on the iPhone 4, and only working on WiFi make it relatively useless for me. I use it with my wife when I am away, but that’s it. FaceTime is a niche product and will probably remain one. It’s a dud – a beautiful dud, but still a dud. A communications tool is only as useful as it’s wide-spread, Apple somehow missed that when they made it an exclusive feature of their products.

It would have been much cheaper and easier for microsoft if they have internally pushed facebook to grab it(SKYPE) and would have made more justification and sense moreover their goal to keep it away from google would also be solved.

think like this, for 8 billion they could have got a good 20% stake in facebook, facebook needs cash…they get cash to buy skype and microsoft get facebook that has skype and a profitable business, for 8 billion they get more than 600 million skype and 600 million facebook customers and a more dominant online presence that is kicking google off its only source of revenue, facebook now is more popular among advertisers than google….

to me microsoft buying skype for 8 billion makes no sense and is probably the worse decision of the year and the next decade for the company

I agree Rick, that seeing this deal going forward can encourage the “long-standing free rebel skype users” to reconsider maintaining their loyalty to a service which is essentially free and the best in it’s class. Microsoft may actually transform Skype into another MSN Messenger, although I would most likely agree with Messenger being entirely replaced by Skype. Regarding the possible integration in Facebook, it’s a missing feature at the moment, but it is one which will see businesses on Facebook thrive in using it. Sorry, I meant: businesses will have to buy Microsoft OCS licenses to be able to talk through Facebook, and possibly end users will have to pay a subacription as well. In the end, it is all Software as a Service.

I hope Microsofts lawyers are smarter than the ones from eBay that time and they buy all of Skype’s IP rights on their p2p technology.And this could make things difficult for others offering p2p communication services as Microsoft is well known to battle on legal grounds as well..

“eBay Inc. (NASDAQ: EBAY) today announced that the investor group led by Silver Lake, which had previously entered into a definitive agreement to acquire a majority stake in Skype from the company, has reached a settlement agreement with Joltid Limited and Joost N.V. that gives Skype ownership over all software previously licensed from Joltid and ends all litigation currently pending against the investor group and eBay at the closing of the acquisition.”

However revealingly, on August 9, 2010 Skype filed a Form S-1 with the U.S. Securities and Exchange Commission (page 195) which described in more detail the above “settlement agreement” with Joltid (which in my personal opinion is now a hangman’s noose around Skype’s neck):

The Joltid Transaction

On November 1, 2009, prior to the completion of the Skype Acquisition, we entered into a transaction with Joltid Limited (“Joltid”) which comprised three components: we and eBay reached a settlement of outstanding litigation with Joltid, we acquired intellectual property rights to the “Global Index” technology from Joltid and Joltid made an $80 million equity investment in us. We collectively refer to these matters as the “Joltid Transaction.” The Joltid Transaction centered on Skype’s acquisition of intellectual property rights in the Global Index software technology that we had originally licensed from Joltid in connection with the founding of Skype. Global Index is software that, among other functionality, facilitates communication in a peer-to-peer network of Skype users. We describe the main terms of the Joltid Transaction below:

Settlement and non-assertion. Skype and Joltid and all other related parties settled all outstanding litigation and claims between them, and each party agreed not to assert any claims against the other party and its customers and distributors under any patents with an application date prior to the fifth anniversary of the Skype Acquisition, which closed on November 19, 2009.

Equity Consideration. Joltid received an approximate 10% share in the share capital of the Company (valued at the time at $224.0 million) and a cash payment of $85.0 million. In addition, Joltid received warrants to purchase an additional 98,680 Skype Global shares, equivalent to a 1% equity stake at such time, exercisable until the earlier of November 19, 2019 or the closing of a reorganization event, as defined in the warrant agreement. The warrant has since been transferred to SEP Investments Pty Limited, an entity unaffiliated with Joltid; for more information on the terms of the warrant, see “Capitalization-Warrants.”

Joltid Investment.Joltid also made an investment in us by investing $80.0 million in cash for an additional approximate 3.4% of our ordinary shares.

Acquisition of Intellectual Property Rights. We acquired from Joltid (a) ownership of Joltid’s intellectual property rights in the Global Index software provided to Skype, subject to the license-back to Joltid of certain rights described in the next bullet point, and (b) co-ownership with Joltid of patents covering database systems that are distributed across multiple computers for enhanced data storage and retrieval, which is a technology that we use in connection with the peer-to-peer architecture enabled by our software. We have the exclusive right to use and enforce these patents in the areas of (i) telephony and/or video communications between end users, and (ii) file transfer functionality, instant messaging and e-mail, when used as an ancillary service or application to telephony and/or video communications between end users, in each case, regardless of the form or method of communication or access thereto. We refer to these areas as the “Skype Exclusive Field.”

License-back to Joltid. We granted to Joltid a non-exclusive, perpetual, royalty-free license to use, distribute, sublicense and otherwise exploit, solely outside the Skype Exclusive Field, the Global Index software that we acquired from Joltid. We retained our rights to use the Global Index software ourselves in any field of use, including outside of the Skype Exclusive Field. In addition, we remain free to license others to use the Global Index software on or in connection with (a) our platform, or publicly available products and services, or (b) the content, products or services of any third party that are enabled by or available through our platform and client or publicly available products and services. However, apart from these uses, we agreed not to license others to use the Global Index software outside of the Skype Exclusive Field.

Other commitments. In addition, we made payments or commitments to pay or invest an additional $32.3 million to or in affiliated parties of Joltid and to reimburse $20.0 million to cover expenses incurred by Joltid. The aggregate settlement of $378.4 million resulted in a net charge of $343.8 million recorded in the Predecessor statement of operations for 2009 and reflects the estimated fair value of the equity relinquished in the settlement, less the estimated fair value of intellectual property received from Joltid.

In connection with the Joltid Transaction, we also entered into a number of related agreements:

Agreements with Rdio, Inc. We invested $6.0 million in Rdio, Inc a new social music service founded by Janus Friis with Niklas Zennstrom, Skype’s founders, who are indirect beneficial owners, among others, of Rdio, Inc., pursuant to a convertible note instrument. We have agreed that for a period extending until November 19, 2011, we will not provide, other than with Rdio, or engage others to provide, services for the broadcast of professionally-produced music that is accessible by computer, mobile device, television set-top box, or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions that allow us to engage in our communications business in the ordinary course. We are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also able to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.

Agreement with Baaima N.V. (formerly Joost N.V.) We entered into an agreement with Joltid and Joost N.V., an affiliate of Joltid, which is now called Baaima, N.V. Skype’s founders, Janus Friis and Niklas Zennstrom, are indirect beneficial owners, among others, of part of Baaima. We agreed that, until May 19, 2012, we would use commercially reasonable efforts to prominently promote a new video service under development by Baaima, on our website, in marketing e-mails and through in-client dynamic content, provided the video service was of sufficient quality. In return, we are entitled to receive 50% of the adjusted gross margin resulting from the revenue generated by Baaima from the video service on our platform. We have agreed that, until May 19, 2012, we will not provide, or engage others to provide, services for the broadcast of professionally-produced cable television, network television, feature films and similar content, in each case, that is accessible by computer, mobile device, television set-top box or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions to enable us to engage in our voice communications business in the ordinary course. In particular, we are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also free to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.

Euroskoon Patent License and Purchase Agreement. We entered into an agreement with Euroskoon, LLC pursuant to which Euroskoon granted us a non-exclusive, irrevocable license to a number of patents. These patents cover programming for peer-to-peer technology. Under the terms of the agreement, we may sublicense these patents to (a) Joltid, (b) end users and third parties in connection with the software based products and services that we and, to the extent they interface with our products and services, our licensees make commercially available and (c) our affiliates. In return, we agreed to make an initial payment of $2.5 million and an annual royalty payment of $1.5 million. Between September 1, 2010 and September 30, 2010, we have the option to purchase the licensed patents for $9.0 million. If we do not exercise this option, Euroskoon has the option between April 1, 2011 and April 30, 2011 to obligate us to purchase the licensed patents for $7.5 million. In connection with our agreement with Euroskoon, we entered into a sublicense agreement with Joltid whereby we granted to Joltid a non-exclusive, perpetual, royalty-free sublicense to the Euroskoon patents described above. Under the terms of the sublicense agreement, Joltid may sublicense these patents to (a) end users and (b) third parties to use, distribute, sublicense and otherwise exploit, in both cases only in connection with the software-based products and services that Joltid and, to the extent they interface with Joltid’s products and services, Joltid’s licensees make commercially available for use by or on behalf of Joltid.

Investment in Atomico. We also agreed to invest $10.0 million in Atomico Ventures II, LLP (which we refer to as Atomico), an Internet, technology and telecommunication venture capital fund. Skype’s founder, Niklas Zennstrom, is a general partner of Atomico, and with Janus Friis, among the most substantial investors in Atomico.

As the writer has identified, most of the staff are hired guns. So, if MS is not buying it for the staff (who’d already have jumped ship post eBay) what is it buying it for? The IP? $8 billion would hire 64,000 senior software engineers for a year. Or more realistically, a team of 10,000 for five years. They’d knock out a version superior to Skype (which has detiorated badly in the last two years) within 18 months. More Microsoft madness.

No, no. Do you know how may registered skype users there are worldwide??? 660+ Million – last counted in 2009. Do you know how much money and how many years it took to get to this number? 4 years! This is what Microsoft is buying. A HUGE userbase – larger than anything else by far. 8 million is a dime in the bucket, and will be worth every penny.

Do the math. $8Bn divided by 8M paying skype users, that’s $1000 per paying user. If these paying users are anything like me, they make $10 last about 1 year (I use it mainly to call 800 numbers in the US for free). $10 / year -> 100 years to get your money back.

700 million counted in 2009. Its probably 1400 million users by now. Do the maths- that about 6 dollars per user. If they are anything like me, ($100 per year) it is easy to see that they will soon make their money back. Its a bargain!!

More than that, this also represents:-
* An opportunity to squeeze out other operating systems (dont even imagine they are going to care for the Linux client).
* An opportunity to know who phones who, and when.
* An application for the xBox 360, another reason to put people on kinect connected to the internet, with microsoft (and the US Govt) in complete control of the hypervisor and the installed software, so they can look and listen into your living room.

Microsoft gets more or less nothing for this. By paying cash they avoid lowering their EPS, but they don’t raise it. They get an internet service that is not profitable and not demonstrably growing much anymore revenue-wise. And under Microsoft, it’s likely to grow less.

eBay actually looks stupider than ever. Had they just held on a couple years ago, they’d be making the billions, instead of breaking even. Well done eBay. Or should you just rename yourselves to PayPal and be done with it?

Facebook could’ve integrated Skype anytime. I don’t see how a piece of Microsoft is going to be easier to integrate than an independent Skype would’ve been. Honestly, if I’m Google, I’m thinking “embrace and extend” is the only way I’m winning in social and I start offering Google Voice integration at this point. I’m not beating Facebook at being Facebook, maybe I can continue to make tens of billions while they make billions.

Microsoft gets nothing from this but some bloviating headlines for a few days (weeks?). This will yield nothing interesting.

Microsoft has Messenger and Link. Messenger needs a real VoIP service. Link has VoIP but it is enterprise only. I think the real key here is the access Skype gives Microsoft to a solid VoIP base that is already built up and available to the general public and business. They may do away with the Skype name and brand someday but they will certain use the underlying VoIP infrastructure/network to build their technologies and services on.

LOL @ groupon for thinking that their site was worth more than 6 mill when google made an offer. There is no way that groupon is worth anything remotely close to skype!! GG skype, i hope microsoft does not ruin you!!!

Gizmo5 didn’t turn into Google Voice, although it did contribute to it. Google purchased GrandCentral and rebranded it. Interestingly, they actually reduced the scope, since GrandCentral supported Canada, while Google Voice is US-only. This is rather strange since there don’t seem to be any additional costs or complexity to serving Canada; indeed, Google Voice actually does support one single Canadian area code.

Where is Hotmail today? Last statistics I read showed that Hotmail/Live has more active users than Gmail or Yahoo. Hotmail/Live also allows for bigger file attachments and large file storage on the “Skydrive”.

As AlanLindsay sated, MS already has a great solution for corporate messaging/sharing with Communicator/Lync. Skype gets them into the consumer space and they will probably bridge the two.

Define great. Microsoft has messaging solution with a wide adoption rate across the enterprise, but as an every day user of OCS I see absolutely nothing great about it. It is a pretty crappy IM client, really.

Hotmail to gmail is pc to Mac is IE to Firefox…Does a greater number of users indicate a better product? No. That said, Skype trumps FaceTime in both numbers and product. Interested to see what comes of this acquisition.

Really need to change that title to “Why Microsoft is wasting $8 billion”.

Honestly, some times this game of “tech keep away” means that smaller companies end up in the hands of giants which pretty much squander their talent and make the company disappear. I’d really like to see how spending $500 million on Danger turned out for Microsoft.

It’s MUCH more likely they’d rather kill Skype than to see Google or Facebook get their hands on it, and that’s a real shame. Facebook would likely integrate it into their website even more (but I’d really hate that as I hate Facebook now). Google would FINALLY integrate a VoIP solution with Google Voice so telcos can shove it up their collective rear-ends. I’d just like these type of acquisitions to actually benefit the consumers for a change instead of wondering how they’ll gracefully degrade services for anything but their own integrated products.

@George Manuval Hotmail friggen dwarfs Google! They are crap when you compare their footprints. Seriously you try to sound smart and throw a few facts and you couldn’t be more wrong. Oh wait you can be more wrong. You’re agreeing with @Jeff above you!

Ummm… Microsoft already has a far larger footprint in the enterprise collaboration arena than Google or Skype – and even Cisco for that matter. I think you have it backwards. Microsoft wants to make the vast consumer VoIP network that Skype has interoperable with its own formidable enterprise network.